Rating Rationale Brickwork Ratings upgrades the ratings from BWR BBB+ to BWR A- for Lakshmi Vilas Bank s Long Term Bonds Issue of `250 Crore Brickwork Ratings revises the Ratings 1 for Long Term Bonds amounting to R`250 Cr of Lakshmi Vilas Bank ( LVB or the Bank ) as follows: Upgradation in rating from BWR BBB+ to BWR A- for the Long Term Bond Issue of ` 250 Cr Type of Instrument Series Amount (` Cr) Issue Date Maturity Date Previous Rating (August 2015) Rating 1 (September 2016) Long Term Bonds VII - Option A VII - Option B 199.50 50.50 2012 2012 2018 BWR BBB+ 2022 (Outlook: Negative to stable) BWR BBB+ to BWR A- Upgrade (Outlook: Stable) Brickwork Ratings have relied on the Bank s results up to FY16, 1 st quarter of FY17, publicly available information and other information/clarifications provided by the Bank. Revision in the rating factors in the improvement in the operating performance, especially in terms of business growth and profitability, and strengthening of the senior/top management.. The rating is, however, constrained by lower CASA ratio and Capital Adequacy Ratio below its comparable peers. The rating also remains sensitive to any deterioration in the asset quality, and consequent increase in provisioning costs. Maintaining the improved financials, strengthening the CRAR through adequate capital infusion and improving the CASA ratio shall be the key challenges for the able and strong top management. Background: Karur (Tamil Nadu) based Lakshmi Vilas Bank became a scheduled commercial bank in August 1958. Since 1974 it started expanding its wings beyond Tamil Nadu. As of FY15, LVB had 460 branches with 916 ATM spread across 16 states. 87% branches in the Southern states. Implementation of Core Banking Solution (CBS) was started in October 2006, and all of the Bank s branches were migrated to CBS by March 2008. Its registered office is located at Karur and Corporate Office at Chennai. Management: Shri. Parthasarathi Mukherjee (YY) was appointed as the new Managing Director and Chief Executive Officer of the Bank succeeding Shri Rakesh Sharma. He took charge in January 2016. Prior to this, Shri. Parthasarathi Mukherjee was the Group Executive, Corporate Relationships 1 Please refer to www.brickworkratings.com for definition of the Ratings www.brickworkratings.com 1 3 Oct 2016
and International Business in Axis Bank. businessmen and professionals. The Board of Directors has many bankers, Other key management personnel include Shri N S Venkatesh- Executive Director, Shri Palaniappan President and CFO, Shri. Akkidas Jacob Vidya Sagar - President - Retail Banking and Shri. Meenakshi Sundaram R. M. President Wholesale Banking. All of them held senior management positions in different banks. Business Performance: Total business of the Bank stood at ` 46,177 Cr as on June 30, 2016, registering an increase of 19.01% from ` 38,802 Cr as on June 30, 2015, and an increase of 2.05% over March 31, 2016 of ` 45,250 Cr. Deposit increased by 16.89% on yoy basis and by 2.22% on qoq basis. Advances grew by 21.85% on yoy and by 1.83% on qoq basis. Of the total credit, the Bank registered a higher growth in loans to agriculture/rural borrowers by 15.20% while it declined in Mid Commercial by 11.21%, Retail by 9.40% and MSME by 3.96% in Jun 2016 over Mar 2016. The Bank s Corporate Advances for Q1FY17 at ` 8,995 Cr stood at 45% of the Bank s total advances, growing by 5.53% over Mar 2016. CASA Ratio of the Bank has been lower compared to its peers in the industry and has come down from 17.42% as on June 30, 2015 to 16.08% as on June 30, 2016. Earnings Quality: Total Net Interest Income for the Bank during Q1FY17 stood at ` 177 Cr against ` 145 Cr in Q1FY16; it was `645 Cr in FY16. The net interest margin has improved from 2.61% in Q1FY16 to 2.75% in Q1FY17; it was 2.82% Cr in FY16. The operating profits of the Bank stood at ` 126 Cr in Q1FY17 improved from ` 100 Cr in Q1FY16; it was 407 Cr for FY16. The Bank s total provisions & contingency was relatively low at ` 35 Cr in Q1FY17 as against ` 60 Cr in Q1FY16; it was ` 177 Cr in FY16. This is due to marginal improvement in the asset quality reflected through Gross NPA and Standard Restructured assets ratio for Q1FY17 over Q1FY16. Accordingly, the Bank s net profits improved to ` 61 Cr in Q1FY17 as against ` 40 Cr in Q1FY16. The net profit of the Bank for FY16 was ` 180 Cr. Consequently, ROA and ROE ratios at 0.84% and 14.96% as on June 30, 2016 respectively also have improved. Asset Quality: Banking industry, in general, has seen asset quality issues in FY16. In LVB, while there is decline in Gross NPA, Net NPA and Restructured Assets, both in absolute numbers and percentage, from Q1FY16 to Q4FY16, an increase is seen in Q1FY17 over FY16. In Q1FY17, Gross NPAs increased from ` 391 Cr in Mar, 2016 to ` 432 Cr in Jun 2016; it was ` 451 Cr in Jun 2015. As of Q1FY17, GNPA and NNPA Ratios increased to 2.14% (1.97% in FY16 and 2.72% in Q1FY16) and 1.30% (1.18% in FY16 and 1.72% in Q1FY16) respectively. www.brickworkratings.com 2 3 Oct 2016
As of FY16, the corporate segment contributed 57%, Retail 20%, MSME 19% and Rural 4% of total Gross NPA. Majority of NPAs came from Basic Metal and Metal products (` 62 Cr), Food Processing (` 52 Cr), Mining & quarrying (` 50 Cr), Chemicals (` 30 Cr), Textiles (` 14 Cr) and Paper & Paper products (` 11 Cr) sectors. In addition, Bank s standard restructured advance has increased from ` 749 Cr in FY16 to ` 793 Cr in Q1FY17. However, the total impaired assets ratio for Q1FY17 stands improved to 6.07% (7.73% in FY16 and 9.55% in Q1FY16). Potential slippages from the restructured portfolio continue to be a key rating sensitivity. The Provisions and contingencies were lower at ` 35 Cr in Q1FY17 while it was ` 177 Cr for the full year FY16. Provision Coverage ratio stood at 66.48% (63.28% in Q1FY16 and 68.55% in FY16). Capital Adequacy: For Q1FY17, the Bank reported a capital adequacy ratio of 10.52%, down from 10.67% in FY16. The Bank s total CRAR as per Basel III stood at 10.52% and Tier I Basel III capital ratio stood at 8.51% (8.69% in FY16). The CRAR, although adequate as per the regulatory requirement is lower compared to banks in its peer group. In terms of regulations, the regulatory CRAR requirement for March 31, 2016 is 9.625% (including capital conservation buffer requirement)-, Tier I is 7.625% and CET-1 is 6.125% (including capital conservation buffer requirement of 0.625%) respectively. In terms of regulations, the regulatory CRAR requirement for March 31, 2017 is 10.25% (including capital conservation buffer requirement)-, Tier I is 8.25% and CET-1 is 6.75% (including capital conservation buffer requirement of 1.250%) respectively. Lakshmi Vilas Bank - Key Parameters KEY Parameters 2013 2014 2015 2016 Q1FY16 Q1FY17 Total Deposits 15,619 18,573 21,964 25,431 22,239 25,995 Deposit Growth (in %) 18.91% 18.26% 15.78% 16.89% Total Advances 11,892 13,038 16,513 19,819 16,563 20,182 Loans Growth 9.64% 26.65% 20.02% 21.85% Total Business 27,511 31,611 38,477 45,250 38,802 46,177 Business Growth 14.90% 21.72% 17.60% 19.01% www.brickworkratings.com 3 3 Oct 2016
CASA Ratio % 14.48% 14.22% 16.67% 17.36% 17.42% 16.08% Profitability Ratios (%) RoE 5.39% 6.17% 11.00% 12.27% 10.76% 14.96% RoA 0.28% 0.32% 0.61% 0.72% 0.65% 0.84% NIM 2.62% 2.87% 2.72% 2.82% 2.61% 2.75% Net Interest Income (NII) 392 486 527 645 145 177 Non Interest Income 197 204 284 305 79 89 Operating Profits 251 309 368 407 110 126 Provisions (other than tax) & contingencies 128 160 188 177 60 35 PAT 91.57 59.66 132 180 40 61 Cost to Income Ratio 54.44% 55.19% 53.60% 62.23% 51.13% 52.83% Asset Liability Profile (%) Loans/Deposit Ratio 76.14% 70.20% 75.18% 77.93% 74.48% 77.64% Gross NPAs to Advances 3.87% 4.19% 2.75% 1.97% 2.72% 2.14% Net NPAs to Advances 2.43% 3.44% 1.85% 1.18% 1.72% 1.30% Provision Coverage Ratio 54.48% 53.16% 60.84% 68.55% 63.28% 66.48% Standard Restructured Assets as % of GrossAdv 5.42% 6.79% 7.96% 5.76% 6.83% 3.93% Gross NPA% + Std Restr (Stressed Advances) 9.29% 10.98% 10.71% 7.73% 9.55% 6.07% CRAR 12.32% 10.90% 11.34% 10.67% 10.28% 10.52% Tier 1 9.15% 7.87% 9.33% 8.69% 8.48% 8.51% Tier II 3.17% 3.03% 2.01% 1.98% 1.80% 2.01% Note: aforesaid as per BWR calculations Rating Outlook: The Bank has been making efforts to improve its balance sheet size and diversify its loan book across segments. Strengthening of senior management is a step in the right direction. www.brickworkratings.com 4 3 Oct 2016
Significant improvement in CASA ratio and continued focus on Asset quality of the Bank, particularly under Restructured Portfolio is needed. While capital infusion, reduction in impaired asset ratios and improvement in profitability will be positive for the rating, any further reduction in CRAR would be negative. Analyst Contact Relationship Contact analyst@brickworkratings.com425-24 bd@brickworkratings.com Phone Media Contact 1-860-425-2742 media@brickworkratings.com Disclaimer: Brickwork Ratings (BWR) has assigned the rating based on the information obtained from the issuer and other reliable sources, which are deemed to be accurate. BWR has taken considerable steps to avoid any data distortion; however, it does not examine the precision or completeness of the information obtained. And hence, the information in this report is presented as is without any express or implied warranty of any kind. BWR does not make any representation in respect to the truth or accuracy of any such information. The rating assigned by BWR should be treated as an opinion rather than a recommendation to buy, sell or hold the rated instrument and BWR shall not be liable for any losses incurred by users from any use of this report or its contents. BWR has the right to change, suspend or withdraw the ratings at any time for any reasons. www.brickworkratings.com 5 3 Oct 2016